[Federal Register Volume 61, Number 174 (Friday, September 6, 1996)]
[Proposed Rules]
[Pages 47398-47401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22812]



[[Page 47397]]


_______________________________________________________________________

Part VII





Department of Education





_______________________________________________________________________



34 CFR Part 682



Federal Family Education Loan Program; Proposed Rule

  Federal Register / Vol. 61, No. 174 / Friday, September 6, 1996 / 
Proposed Rules  

[[Page 47398]]



DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC35


Federal Family Education Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Secretary proposes to amend the regulations governing the 
Federal Family Education Loan (FFEL) Program. The FFEL regulations 
govern the Federal Stafford Loan Program, the Federal Supplemental 
Loans for Students (Federal SLS) Program, the Federal PLUS Program, and 
the Federal Consolidation Loan Program, collectively referred to as the 
Federal Family Education Loan Program. The Secretary is proposing to 
make changes to the due diligence requirements for lenders and guaranty 
agencies participating in the FFEL Program.

DATES: Comments must be received on or before November 5, 1996.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Pamela A. Moran, U.S. Department of Education, Post Office 
Box 23272, Washington, DC 20026-3272. Comments may also be sent through 
the internet to [email protected].
    To ensure that public comments have maximum effect in developing 
the final regulations, the Department urges that each comment clearly 
identify the specific section or sections of the regulations that the 
comment addresses and that comments be in the same order as the 
regulations.
    Comments that concern information collection requirements must be 
sent to the Office of Management and Budget at the address listed in 
the Paperwork Reduction Act section of this preamble. A copy of those 
comments may also be sent to the Department representative named in the 
preceding paragraph.

FOR FURTHER INFORMATION CONTACT: Ron Streets, Program Specialist, Loans 
Branch, Policy Development Division, Policy, Training, and Analysis 
Service, U.S. Department of Education, 600 Independence Avenue, S.W. 
(room 3053, ROB-3), Washington, DC 20202-5449. Telephone: (202) 708-
8242. Individuals who use a telecommunications device for the deaf 
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION:

Background

    The Secretary is proposing to amend 34 CFR Part 682 of the 
Department's regulations to improve the administration and the 
integrity of the FFEL Program. By improving program efficiency, these 
proposed regulations will reduce burden for lenders and improve the 
collection of outstanding FFEL loans and potential liabilities owed to 
the Secretary.

Proposed Regulatory Changes

    The Secretary proposes to amend the following sections of the 
regulations to reflect changes needed to improve the due diligence 
provisions in the FFEL Program.

Section 682.401  Basic Program Agreement

    The Secretary proposes to amend Sec. 682.401(b)(27) by codifying 
the interpretation outlined in the Department's Dear Colleague Letter 
95-G-286 dated November 1995, to permit guaranty agencies to retain 
collection costs totaling up to 18.5 percent of the outstanding 
principal and accrued interest of a defaulted FFEL loan that is repaid 
by a consolidation loan as long as their collection costs are included 
in the payoff amount certified by the guaranty agency.

Section 682.404  Federal Reinsurance Agreement

    The Secretary proposes to amend Sec. 682.404(a)(2)(ii) by requiring 
guaranty agencies to offer preclaims assistance to lenders no later 
than the 75th day of delinquency. Currently, the regulations do not 
include an explicit deadline by which the guaranty agencies must 
provide this service and some agencies have not provided preclaims 
assistance on a timely basis. This proposal would create uniformity in 
the treatment of delinquent borrowers and ensure that preclaims is 
initiated early enough to successfully avert default.
    This section is also amended to require guaranty agencies, as part 
of their preclaims assistance to lenders, to provide counseling and 
written consumer information to the borrower by the 100th day of 
delinquency informing the borrower of the option to consolidate student 
loans under the FFEL Program or the Federal Direct Consolidation Loan 
Program to avoid default. The Secretary believes that providing this 
information to delinquent borrowers during the preclaims assistance 
process will help reduce defaults by ensuring that borrowers have 
information regarding consolidation when it is critically needed. 
Failure of the agency to provide this information would constitute a 
violation of due diligence in servicing a loan.
    This section is further amended to require that payments made by a 
borrower on a defaulted loan to a guaranty agency must be first applied 
to the agency's collection costs attributable to that payment on the 
loan and then to reinsured interest and principal. This amendment will 
ensure that the borrower remains responsible for paying collection 
costs as required by section 484A(b) of the Higher Education Act of 
1965, as amended. The Secretary also solicits particular comment on 
whether a guaranty agency should be allowed to apply the borrower's 
payment to incidental charges such as late charges first, after 
collection charges, rather than only after all principal and interest 
as is currently the case.

Section 682.410  Fiscal, Administrative, and Enforcement Requirements

    The Secretary proposes to amend Sec. 682.410(b)(2) that governs the 
amount of collection charges guaranty agencies may charge the borrower. 
These regulations propose to require guaranty agencies to assess a 
defaulted borrower the same amount of collection charges assessed by 
the Department for loans held by the Department. The collection rate 
currently assessed by the Department is 25 percent. The Secretary 
believes that standardization of collection costs across the industry 
will both reduce confusion and ensure equitable treatment for borrowers 
whose FFEL loans are guaranteed by multiple guaranty agencies. The 
Secretary will inform guaranty agencies annually what the applicable 
rate is in sufficient time for agencies to make necessary system 
changes. However, the Secretary solicits additional comment on whether 
agencies should be provided with the flexibility to assess less than 
the Department's collection rate if the agency's actual costs of 
collection support this.
    The Secretary also proposes to amend Sec. 682.410(b)(6)(vii)(A) 
that currently provides guaranty agencies the option of either 
initiating wage garnishment or instituting a civil suit against the 
borrower whose loans have defaulted. These proposed regulations remove 
that option and instead require that guaranty agencies initiate wage 
garnishment proceedings if the borrower has sufficient income. If the 
agency determines that the borrower has insufficient income to satisfy 
the debt by garnishment, but has assets from

[[Page 47399]]

which the debt can be satisfied, the guaranty agency will be required 
to assign the debt to the Department so the Secretary can file a civil 
suit against the borrower. The Department intends to litigate assigned 
accounts through the Department of Justice in order to place a lien 
against the borrower's assets to satisfy the debt. The Secretary 
believes that this change will result in more effective collection of 
defaulted loans across the country because guaranty agencies have had 
varying success in collecting loans through litigation.

Section 682.411  Due Diligence by Lenders in the Collection of Guaranty 
Agency Loans

    The Secretary proposes to amend Sec. 682.411(c) to expand the 
length of time from 1-10 days delinquent to 1-15 days delinquent that 
lenders will have to send the first written notice or collection letter 
to a delinquent borrower. This change will afford the lender additional 
time to receive payments from a delinquent borrower before it has to 
send out the first warning of delinquency to that borrower. This 
reduces the lender's burden of beginning the due diligence process 
prematurely for delinquent borrowers whose payments are received within 
the maximum proposed 15-day period.
    The Secretary also proposes to amend Sec. 682.411(d)(2) to modify 
the requirements for the two collection letters that must be sent to a 
borrower during the period of 16-180 days delinquent (16-240 days 
delinquent for a loan repayable in installments less frequently than 
monthly) to include additional warnings to the borrower that the 
guaranty agency may: (1) Institute proceedings to offset other payments 
made by the federal government to the borrower; and (2) assign the loan 
to the federal government for litigation against the borrower.

Section 682.413  Remedial Actions

    Section 682.413(b) is amended to expand the possible remedial 
action available to the Secretary if a guaranty agency fails to meet 
the requirements of Sec. 682.410 to include mandatory assignment of 
FFEL loans to the Department at the Secretary's discretion. Currently 
the only penalty available to the Secretary is loss of reinsurance. The 
Secretary does not believe that this is always in the best interest of 
the program.

Executive Order 12866

1. Assessment of Costs and Benefits

    These proposed regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the Order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the proposed regulations are 
those determined by the Secretary to be necessary for administering 
this program effectively and efficiently. Burdens specifically 
associated with information collection requirements, if any, are 
identified and explained elsewhere in this preamble under the heading 
Paperwork Reduction Act of 1995.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the regulations justify the costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these proposed 
regulations without impeding the effective and efficient administration 
of the program.

2. Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following: (1) Are the requirements in the proposed regulations 
clearly stated? (2) Do the regulations contain technical terms or other 
wording that interferes with their clarity? (3) Does the format of the 
regulations (grouping and order of sections, use of headings, 
paragraphing, etc.) aid or reduce their clarity? Would the regulations 
be easier to understand if they were divided into more (but shorter) 
sections? (A ``section'' is preceded by the symbol ``Sec. '' and a 
numbered heading; for example, Sec. 682.413 Remedial action.) (4) Is 
the description of the regulations in the SUPPLEMENTARY INFORMATION 
section of this preamble helpful in understanding the regulations? (5) 
What else could the Department do to make the regulations easier to 
understand?
    A copy of any comments that concern how the Department could make 
these proposed regulations easier to understand should be sent to 
Stanley M. Cohen, Regulations Quality Officer, U.S. Department of 
Education, 600 Independence Avenue S.W. (Room 5100, FB-10), Washington, 
DC 20202-2241.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities.
    According to the U.S. Small Business Administration Size Standards, 
small entities affected by these regulations are lenders with assets 
below $100,000,000. Two provisions of these regulations affect small 
(and large) lenders. The first could provide a positive economic 
benefit to small (and large) lenders by providing additional 
flexibility for regulatory compliance. This provision does not impose a 
significant adverse economic impact. The second provision would impose 
minor economic costs on small (and large) lenders by requiring them to 
modify two letters sent to delinquent borrowers. These letters are 
required by existing regulations. These additional costs would not have 
a significant adverse economic impact. This activity would protect the 
Federal fiscal interest as well as the interests of the borrowers under 
the programs.
    The Secretary particularly requests comments from small lenders on 
whether the proposed changes would have a significant economic impact 
on them.

Paperwork Reduction Act of 1995

    Section 682.411 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 
the Department of Education has submitted a copy of this section to the 
Office of Management and Budget (OMB) for its review.
    Collection of Information: Federal Family Education Loan Program
    These regulations strengthen the collectibility of delinquent FFEL 
loans by participating lenders. Monies collected under these 
regulations enable new and continuing students to borrow to help defray 
the cost of education.
    The public reporting and recordkeeping burden for this collection 
of information is estimated to be 3,398.31 hours in order to make the 
necessary system changes to: (1) add additional warnings to the 
existing collection letters sent to delinquent borrowers and (2) 
increasing the period

[[Page 47400]]

of time lenders will have to send the first written notice or 
collection letter to a delinquent borrower. This is a one-time 
activity.
    The estimated burden for incorporating the additional warning 
paragraphs into the existing collection letters was calculated as 
follows:

Respondents.......................         5,829                        
Responses.........................    x    1                            
Hours per respondent..............    x    0.083 (5 minutes)            
                                          ------------------------------
Annual reporting burden...........         483.81 hours                 
                                                                        

    The estimated burden associated with expanding the window regarding 
when the first collection letter is sent to a delinquent borrower was 
calculated as follows:

Respondents......................         5,829                         
Responses........................    x    1                             
Hours per respondent.............    x    0.5 (30 Minutes)              
                                         -------------------------------
    Annual reporting burden......         2,914.50 hours                
      Total annual burden hours=3,398,31................................
                                                                        

    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235, New Executive 
Office Building, Washington, D.C. 20503; Attention: Desk Officer for 
U.S. Department of Education.
    The Department considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Department, including whether the information will have a practical 
use;
     Evaluating the accuracy of the Department's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Department on the 
proposed regulations.

Invitation To Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations.
    All comments submitted in response to these proposed regulations 
will be available for public inspection, during and after the comment 
period, in room 3053, Regional Office Building 3, 7th and D Streets, 
S.W., Washington, DC between the hours of 8:30 a.m. and 4 p.m., Monday 
through Friday of each week except federal holidays.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether the 
proposed regulations in this document would require transmission of 
information that is being gathered by or is available from any other 
agency or authority of the United States.

List of Subjects in 34 CFR Part 682

    Administrative practice and procedure, Colleges and universities, 
Education, Loan programs-education, Reporting and recordkeeping 
requirements, Student aid, Vocational education.

    Dated: July 31, 1996.
Richard W. Riley,
Secretary of Education.

(Catalog of Federal Domestic Assistance Number 84.032, Federal 
Family Education Loan Program)

    The Secretary proposes to amend part 682 of title 34 of the Code of 
Federal Regulations as follows:

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

    1. The authority citation for part 682 continues to read as 
follows:

    Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

    2. Section 682.401 is amended by revising paragraph (b)(27) to read 
as follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (27) Collection Charges and Late Fees on Defaulted FFEL loans being 
Consolidated. (i) A guaranty agency may add collection costs in an 
amount not to exceed 18.5 percent of the outstanding principal and 
interest to a defaulted FFEL Program loan that is included in a Federal 
Consolidation loan.
    (ii) When returning the proceeds from the consolidation of a 
defaulted loan to the Secretary, a guaranty agency may only retain the 
amount added to the borrower's balance pursuant to paragraph (b)(27)(i) 
of this section.
* * * * *
    3. Section 682.404 is amended by revising paragraph (a)(2)(ii) and 
paragraph (f) to read as follows:


Sec. 682.404  Federal reinsurance agreement.

* * * * *
    (a) * * *
    (2) * * *
    (ii) Preclaims assistance means collection assistance made 
available to the lender by the guaranty agency no later than the 75th 
day of delinquency. This assistance must include collection activities 
that are at least as forceful as the level of preclaims assistance 
performed by the guaranty agency as of October 16, 1990, and involves 
the initiation by the guaranty agency of at least 3 collection 
activities, one of which is a letter designed to encourage the borrower 
to begin or resume repayment. As part of their preclaims assistance, 
guaranty agencies must provide counseling and written consumer 
information to the borrower by the 100th day of delinquency informing 
the borrower of the borrower's option to consolidate the defaulted loan 
under the FFEL Program or the Federal Direct Consolidation Loan Program 
to avoid default. Failure of the agency to provide this information 
constitutes a violation of the guaranty agency's obligation to perform 
due diligence in collecting a loan; and
* * * * *
    (f) Application of borrower payments. A payment made to a guaranty 
agency by a borrower must be applied first to the collection costs due 
only for the amount collected in the particular payment month on the 
loan and then to reinsured interest and then to principal. The 
borrower's payments may be applied to other incidental charges, such as 
late charges, only after the repayment of all principal and interest.
* * * * *
    4. Section 682.410 is amended by revising paragraphs (b)(2) and 
(b)(6)(vii)(A) to read as follows:


Sec. 682.410  Fiscal, administrative, and enforcement requirements.

* * * * *
    (b) * * *
    (2) Collection charges. Whether or not provided for in the 
borrower's promissory note, the guaranty agency

[[Page 47401]]

shall charge a borrower an amount equal to reasonable costs incurred by 
the agency in collecting a loan on which the agency has paid a default 
or bankruptcy claim. These costs may include, but are not limited to, 
all attorney's fees, collection agency charges, and court costs. The 
amount charged a borrower must equal the amount the same borrower would 
be charged for the cost of collection if the loan was held by the U.S. 
Department of Education.
* * * * *
    (6) * * *
    (vii) * * *
    (A) Except as provided in paragraph (b)(6)(vii)(B) of this section, 
during this period but not sooner than 30 days after sending the notice 
described in paragraph (b)(5)(vi) of this section, the agency shall 
initiate proceedings to offset the borrower's state and federal income 
tax refunds and other payments made by the federal government to a 
borrower, and shall initiate wage garnishment proceedings against the 
borrower by the 225th day. If the agency determines that the borrower 
has insufficient income to satisfy the debt through wage garnishment, 
but has assets from which the debt can be satisfied, the agency shall 
assign the loan to the Department by the 545th day.
* * * * *
    5. Section 682.411 is amended by revising paragraphs (c) and (d) to 
read as follows:


Sec. 682.411  Due diligence by lenders in the collection of guaranty 
agency loans.

* * * * *
    (c) 1-15 days delinquent: Except in the case where a loan is 
brought into this period by a payment on the loan, expiration of an 
authorized deferment or forbearance period, or the lender's receipt 
from the drawee of a dishonored check submitted as a payment on the 
loan, the lender during this period shall send at least one written 
notice or collection letter to the borrower informing the borrower of 
the delinquency and urging the borrower to make payments sufficient to 
eliminate the delinquency. The notice or collection letter sent during 
this period must include, at a minimum, information for the borrower 
regarding loan consolidation, forbearance and other available options 
to avoid default.
    (d) 16-180 days delinquent (16-240 days delinquent for a loan 
repayable in installments less frequent than monthly): (1) Unless 
exempted under paragraph (d)(4) of this section, during this period the 
lender shall engage in at least four diligent efforts to contact the 
borrower by telephone and send at least four collection letters urging 
the borrower to make the required payments on the loan. At least one of 
the diligent efforts to contact the borrower by phone must occur 
before, and another one must occur after, the 90th day of delinquency.
    (2) At least two of the collection letters required under paragraph 
(d)(1) of this section must warn the borrower that if the loan is not 
paid, the lender will assign the loan to the guaranty agency that, in 
turn, will report the default to all national credit bureaus, and that 
the agency may institute proceedings to offset the borrower's state and 
federal income tax refunds and other payments made by the federal 
government to a borrower or to garnish the borrower's wages, or assign 
the loan to the federal government for litigation against the borrower.
* * * * *
    6. Section 682.413 is amended by redesignating paragraph (b) as 
paragraph (b)(1) and adding a new paragraph (b)(2) to read as follows:


Sec. 682.413  Remedial actions.

* * * * *
    (b)(1) The Secretary requires a guaranty agency to repay 
reinsurance payments received on a loan if the lender, third-party 
servicer, if applicable, or the agency fails to meet the requirements 
of Sec. 682.406(a).
    (2) The Secretary may require a guaranty agency to repay 
reinsurance payments received on a loan or to assign FFEL loans to the 
Department if the agency fails to meet the requirements of 
Sec. 682.410.
* * * * *
[FR Doc. 96-22812 Filed 9-5-96; 8:45 am]
BILLING CODE 4000-01-P